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The Oil Price Crash Won’t Stop The Tesla Boom

The falling price of gas has brought some relief to drivers fed up with seeingnumbers whirr on the pump at wallet-draining speeds. According to the AAA, Americans are, on average, paying $1.929 for a gallon of regular gasoline and $2.584 for the premium brand - about 29 percent and 21 percent cheaper, respectively, compared to a year ago.

Electric vehicle manufacturers, however, are probably less than thrilled by the turn of events. After all, one of the biggest selling points for EVs is the fuel cost savings one can accumulate by owning a vehicle running on cheaper electricity instead of gasoline.

Indeed, the leading EV manufacturer, Tesla Inc.(NASDAQ: TSLA), is now facing a triple whammy of low gas prices, weaker fuel-economy standards introduced by the Trump administration and a potential fall in demand due to the coronavirus pandemic.

Tesla is just coming off another solid quarter where the company has revealed that it produced almost 103,000 vehicles and delivered approximately 88,400 for its best Q1 ever. The deliveries tally included 76,200 Model 3 and Model Y vehicles as well as 12,200 Model S and Model X vehicles, marking a 40.3 percent Y/Y increase.

TSLA shares have been rallying hard after the update with Wall Street chipping in with a couple of upgrades. TSLA shares have managed to pare back some of their earlier losses and now sit on an impressive 22.7 percent YTD return.

But maybe the bulls need to pump their brakes? After all, the majority of those Tesla orders were booked many months ago when oil prices were still much higher, and COVID-19 had not reared its ugly head. Related: Why The OPEC+ Output Cut Is Irrelevant

Are TSLA investors now whistling past the graveyard?

Tesla Still Cheaper

Cheap gas and weaker fuel-economy standards is terrible news for EV manufacturers like Tesla - or so the bears argue.

The value proposition for EVs appears to be much more robust in a $4-a-gallon environment than a $1-a-gallon one. Persistently low gas prices could act as a disincentive for people who are contemplating an EV switch because it might take many years for the minimal cost savings to pay back for the higher sticker price.

It gets even worse with lax environmental rules after Trump recently granted companies an "open license to pollute."

According to the new Environmental Protection Agency (EPA) guidelines, companies are now mostly exempt from consequences for polluting the air or water during the coronavirus outbreak. Meanwhile, automakers now only have to aim for an average fleetwide fuel-economy standard of about 40 mpg by 2026 compared to the Obama-era target of 46 mpg.

As expected, many manufacturers are happy about the rollback, with about half choosing to go with the less strict standard. In contrast, the other half has pledged to stick to California's more stringent regulations. While it's tempting to think that the lower standard means less competition for Tesla, it also means that there will be less pressure to switch to cleaner alternatives like EVs.

But how much has cheap gas dented Tesla's business case?

From a purely technical viewpoint, not much. It's still considerably cheaper to operate a Tesla than your average gas-powered vehicle.

An interesting study done a couple of years ago found that Americans waste billions of dollars every year by filling up unnecessarily on pricey premiums instead of regular gasoline. According to AAA, 70 percent of Americans drive cars that require only regular gas; 16 percent require premium, and the remaining 14 percent need mid-grade gas or have an alternative power source like electric batteries. Another study found that Americans paid about 15 cents a mile for their gas (the national average price of gas then was $2.96 per gallon). Using this information, we calculate that American drivers are currently paying ~10.6 cents per driven mile on average.

Tesla's charging cost largely depends on the model and how you use your vehicle. SolarReviews has worked out that it costs 3.7 cents per mile to charge a Model 3 and 5.2 cents a mile for Model X, assuming a national average cost of 13 cents per kWh for power across the United States. In other words, the average Tesla driver is paying just 40 percent of what an ICE driver is paying for their fuel, low gas prices notwithstanding.

In 2017, AAA reported that owning and operating a new vehicle in the United States cost an average of $8,469 annually, or $706 each month. Driving costs were lowest for small sedans ($6,354), small SUVs ($7,606), hybrids ($7,687), and electric vehicles ($8,439). Mind you, that was before mass production of the $35,000 Model 3 kicked off, so the cost of ownership of a Tesla is currently much lower than the figure back then.

Tesla Cybertruck in Trouble

Gas prices would have to fall below $10 per barrel - or go into negative territory - before gas-powered vehicles can start challenging EVs' low operating costs. But with the environmental movement now in full swing, the EV-gas price nexus is likely to keep getting weaker.

Indeed, it's quite remarkable that EVs have continued to gain market shares at a torrid pace over the past decade despite gas prices generally remaining low and the US federal gas tax remaining unchanged since the 1990s.

The cybertruck is set to start rolling off production lines in late 2021, with the tri-motor all-wheel-drive version going into production a year later. Full-size pickups are not particularly noted for their fuel economy, so fuel savings might be a much stronger reason to choose an electric truck over a gasoline one. But with fuel prices so low, the urge to take a chance on an experimental truck might quickly disappear.

In the final analysis, the global electrification drive remains in full swing, and low gas prices might only act as a speed bump.

Michael Jost, Volkswagen's chief strategist, recently told reporters that even a prolonged slump in oil prices will not persuade the company to abandon its long-term commitment to its CO2 reduction goals and EV-strategy. You can bet plenty of other automakers [and consumers] feel the same way.

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Tesla owners have lower operating costs but that's not what they talk about. They talk about performance, the kick in the pants. PHEV/EVs also have the advantage of refueling at home even if they aren't a performance model. Electric vehicle sales will grow regardless of oil price because it's a luxury feature.

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